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Links with Economic Crises

Economic crises lead to increased unemployment through loss of jobs in the formal economy and to increased employment – through new entrants – in the informal economy. For example, recent estimates by the International Labour Organization (ILO) suggest informal employment in Colombia, Ecuador, Mexico, Panama, and Peru increased from 52.9 per cent of total employment in 2007 to 53 per cent in 2008 and 53.6 per cent in 2009 (ILO 2009a). In 2009, the ILO projected that the global recession would lead to a worldwide increase of 38 million unemployed and 200 million working poor (i.e., those who earn less than US$2 per day) (ILO 2009b).

Related assumptions are that the informal economy provides a refuge to those who lose jobs in the formal economy, and that the informal economy can cope with or adjust to the shocks associated with economic downturns and crises (Cunningham and Maloney 2000). But available evidence – slim as it is – challenges these assumptions.

Evidence from previous crises suggests that non-standard or informal wage workers bear the brunt of job cuts and reduced working hours (Jutting and Laiglesia 2009). They are often the first to lose jobs as firms typically shed their peripheral workers (hired under sub-contracts or temporary contracts) before they shed their core workers. Also, industrial outworkers or sub-contracted workers face loss of work orders: see an overview of two studies done by HomeNet Thailand on the impact of the Asian financial crisis of the late 1990s on home-based industrial outworkers (called homeworkers) in Thailand.

Similarly, evidence from the recent economic recession suggests that, in the five Latin American countries noted above, “labour adjustments in formal enterprises in response to the economic slowdown took place through layoffs of workers with irregular or atypical employment contracts” (Jutting and Laiglesia 2009).

But what happens to those who were already engaged in the informal economy? What kind of “cushion” does the informal economy offer during crises, and to whom? At least some answers to these questions can be found in individual experiences gathered from many places around the globe:

Read a 2012 article on the impact of the recession on street vendors in Kenya.

Demand sensitivities, price fluctuations and the dynamics of competition shape the informal economy in good times and in bad. But what is striking is that those who assert the informal economy serves as a “cushion” during crises do not consider how shifts in demand, prices, and competition associated with crises affect the informal economy: they simply assume that crisis-induced shifts affect the formal economy and somehow avoid the informal economy. For this reason, there is little (if any) information on how previous crises affected the informal economy except for the predicted increase in informal employment. What follows is a summary of findings from two rounds of study (in 2009 and 2010) designed to assess the impact of the global recession on the lives and livelihoods of three groups of urban informal workers.

In mid-2009, 77 per cent of the respondents reported that their incomes had fallen in the past months. A year later, 55 per cent reported that their incomes had fallen further between mid-2009 and mid-2010.

Round 1 research found that informal enterprises and informal wage workers are affected in many of the same ways as formal firms and formal wage workers. Informal workers suffer, directly and indirectly, from shrinking consumption and declining demand crucial to their livelihoods. Informal wage workers are often laid off first, before those with formal contracts. Informal enterprises/wage workers face increased competition as more people enter the informal economy and/or as more jobs are informalized.

The three groups of urban informal workers experienced these trends to different degrees and in different ways:

Home-based workers who produced for global value chains experienced, for the most part, a sharp decline in their work orders. Home-based workers who worked on their own account for local markets reported increased competition and many had to reduce their prices to remain competitive.

Street vendors experienced a significant drop in local consumer demand. They reported the greatest increase in competition, as greater numbers of people who lost their jobs or had to supplement incomes turned to vending as a possible source of income.

Waste pickers experienced the sharpest decline in demand and selling prices. They were most sensitive to the influence of the crisis on international pricing dynamics in their sector, which began as early as October 2008.

Unlike some of their formal counterparts, those working informally have no cushion to fall back on. Respondents reported being forced to overwork, take on additional risks, cut back on expenditure (including food and health care), and still saw their incomes decline. The evidence strongly suggests that the global recession is pushing informal workers and their families further into impoverishment.

The Round 2 research suggests a lag in recovery for the informal workers, despite some positive improvements. Persistent unemployment and underemployment in the formal economy continued to drive new entrants into informal employment. Some respondents reported stronger demand for their goods and services over the previous year, but many continued to face low levels of sales or orders.

While 77 per cent of the respondents in Round 1 reported lower incomes between early and mid-2009, 55 per cent said their incomes continued to decline from 2009 to mid-2010. Among those who reported their income had risen since mid-2009, none reported that their income had returned to pre-crisis levels; most reported that their incomes had not kept pace with the rising cost of living. Persistently high inflation – affecting food and fuel prices in particular – intensified pressure on family budgets. Respondents continued to restrict their families’ diets. School withdrawals, not common in the first round of study, appeared to be on the rise in the second. Again, the three groups experienced these trends to different degrees and in different ways.

Interventions

In both rounds of the study, interviewees were asked to identify and prioritize interventions that would support their livelihoods. Short-term emergency measures were not top priority; rather, respondents opted for support for their ongoing livelihood activities. This included access to financial services, skills training and market analysis and access. Wage protection, workplace improvements and a range of social protection measures were also identified as priority interventions.

Home-based workers indicated they wanted higher piece rates, lower utility rates (as they must cover the costs of production), and greater inclusion in social insurance and assistance schemes.

Street vendors reported needing a secure place to vend in a good location, as well as access to low interest loans.

In brief, the global economic crisis has impacted the informal economy in many of the same ways that it has impacted the formal economy. Informal wage workers faced loss of jobs or further informalization of their contracts. The informal self-employed faced decreased demand, falling prices, and fluctuations in exchange rates, interest rates, and prices. The informal workforce, as a whole, faced increased competition from the new entrants into the informal economy and had no cushion to fall back on. As the report on Round 1 of the study concluded, the global economic recession has led to “more and more workers competing for a sliver of a shrinking informal economy.” See more information on the respondents’ recommended responses. And, as the report on Round 2 of the study concluded, recovery in the informal economy depends on recovery – both of businesses and employment – in the formal economy and requires targeted support.

According to many observers, the global recession brought on by the financial crisis had ended by late 2010. But the recovery in employment has not kept pace with the recovery in business. In many developed countries, unemployment remains at high levels and shows no signs of coming down rapidly. In the USA, unemployment stayed at record high levels (above 10%) until February 2011, when a small decline was reported.

In many developing countries, underemployment (defined as working but not earning enough to escape poverty) was at high levels before the crisis, reached even higher levels during the crisis, and remains high. Policymakers need to recognize that more needs to be done to promote employment recovery: not only for the unemployed but also for the underemployed, particularly in developing countries. Also, policymakers need to recognize that the informal economy is an important source of employment during good times as well as bad.